Chery Automobile Co. Ltd. (奇瑞汽车股份有限公司) is one of the most important of Chinese automobile manufacturers. Though it remains owned by the local government of Wuhu, and is by no means the very largest of China’s car companies, Chery has been able to compete effectively in a very crowded domestic market and has established a significant position in international markets. This is rather remarkable for a firm founded in 1997 in a very poor province not known for economic innovation.

Historical Development

By Western standards, Chery is an unusual firm. It is the result of the hybrid nature of many Chinese businesses, combining government ownership and effective and competitive management. Quite simply, Chery exists because of the entrepreneurial efforts of government officials – known as the “Eight Guardians” - in a relatively small Chinese city looking to expand the economic base of their area and spurred on by the dramatic economic growth happening all around them. By the mid-1990s economic reform had led to fifteen years of rapid growth concentrated along the eastern coat of China. A second stage of growth extending these opportunities across the entire nation began in 1993. The Wuhu government, with support from the Anhui provincial government, was in the best position to define a new economic direction for the area and establish firms able to operate in the new market economy. The municipal officials purchased an automobile engine assembly line and engine technology from British Ford in 1996, attracted a number of entrepreneurial engineers from FAW-Volkswagen, and combined a set of auto parts companies already owned by the Wuhu government to establish the predecessor to Chery in 1997. Skirting many of the laws and mandates of the central government, Chery moved quickly from engine production to produce its first car – the “Qi Rui” – in 2000. Unlicensed by the Chinese government and ordered to close, the firm negotiated with an existing state-owned Shanghai auto firm, SAIC (Shanghai Automotive Industry Corporation), to recapitalize and remain in business with the new name Chery. WTO entry for China in 2001 loosened regulations and by 2004 Chery had bought out SAIC.

The Chinese Automotive Industry

As with many businesses in China following the economic reform and opening to the world in 1978, the automobile business faced a large technology and managerial gap with world standards. Recognizing its bargaining power, the Chinese government decided to trade market access for technology and knowledge transfer via joint ventures between global firms and nascent Chinese firms. A system of joint venture firms followed as Volkswagen, General Motors, Jeep, Ford, Toyota and Honda, among others, established production facilities in China. For example, FAW - First Auto Works - a Chinese firm dating to the 1950s, has joint venture relationships with Volkswagen, Toyota and Mazda (owned by Ford) for the production and distribution of autos in China. Over time, the continuously improving technology and knowledge of auto production and management has been transferred to these joint venture firms. It was these new capabilities that Chery tapped into for its own development. But Chery was much more proactive than most Chinese joint venture firms in working to capture and leverage its new technology and knowledge capabilities.

The Chinese auto industry is the most dynamic and complicated in the world. The growth rate of production is breathtaking. In 2000, and prior to WTO access, Chinese auto production was 2.1 million vehicles; in 2007, production was 8.9 million vehicles. Production more than quadrupled in only eight years, an astonishing feat. Perhaps even more remarkable is the remaining room for continued growth. Only 4% of Chinese own a car, whereas 60% of Europeans and 80% of Americans do so. Chinese production in 2007 grew by 22% over 2006, while world production grew by 5%. Approximately 42% of all growth in global auto production in 2007 came from China. However, the deepening global recession also affected China in 2008, when the growth rates of 20%+ slowed to near zero. By late 2008, Chinese auto firms were seeking government help in coping with falling demand. The rapid growth in Chinese auto production and use has also made an increasingly important contribution to an already serious problem of urban air pollution.

Production of cars and trucks in China takes place in two quite different types of firms. The first type is a Chinese firm directly connected to foreign auto firms through a joint venture and license that permits them to build a foreign designed vehicle. There are eight major firms like this. More than two-thirds of the vehicles produced in China are by Chinese firms using such a license. However, this proportion has been steadily declining in favor of the second type of producer, the Chinese independent firm that has developed its own brand. These firms number more than 100 and most are linked to local governments wanting to bolster the local economy and in a position to use local protectionist policies for this purpose. The result is a fragmented car market in which most independent firms operate at less than an efficient capacity. However, independent producers have expanded their minority position in the Chinese market, achieving almost 29% market share in 2007 up from only 18% in 2001. This situation creates a very competitive environment, with falling prices and significant losses by most independent firms. The autos produced by these independents usually sell for 30% less than similar joint venture brands. Virtually all commentators predict a consolidation in the industry, with many small and weak firms being absorbed by more competitive firms. Chinese autos have made significant strides in catching up to the global technology frontier but remain behind in important ways. For example, Chinese manufacturers have not adopted the practices of lean manufacturing very well, perhaps because of the advantages of low wages. However, as wages rise, these advantages decline and the incentives for lean production rise.

Chery as an Independent Automobile Firm

The President and CEO of Chery is Yin Tongyao, brought to the company from FAW in 1996. Chery is the largest of the independent auto firms in China, producing 489,000 vehicles in 2007. The second largest independent is Geely, located in Zhejiang Province, producing 220,000 vehicles in 2007. The market segment for Chery has traditionally been in the low-end, small and inexpensive car. However, it has recently expanded its product line considerably. Chery currently produces 12 models, ranging from subcompacts to sedans, SUVs, and vans. In addition, an all-electric car is in development. Along with Geely, it is a significant Chinese exporter of cars, mostly to Middle East nations, selling 120,000 units in 2007. Chery has followed a path of several Chinese firms, who quickly began exporting by selling products in parts of the world separated from competition by Western firms. Chery began exporting in 2001 and its sales are concentrated in Iran. Moreover, Chery has adopted an even more ambitious plan to establish assembly facilities and sales operations in as many as 50 countries and engage in a series of global strategic alliances. These relationships permit Chery to obtain knowledge and technology to stay abreast of global quality and innovation standards and develop knowledge of a variety of auto markets. The company has taken steps to enter the U.S. auto market, though the timing of this is uncertain.

Probably a result of its independence, Chery has worked hard to develop its own capabilities as an auto producer. Chery has been aggressive in attracting talented engineers from other, usually joint venture, Chinese auto firms; but it has also been successful in bringing engineers from the United States, Japan and South Korea. Combined with strategic alliances, Chery’s efforts have been effective in capturing and applying knowledge. In a significant development, the company has been able to move from reverse engineering other company’s designs to developing its own designs. Along the way, Chery has come to devote about 10% of sales to R&D, a very high figure for a developing nation firm. By contrast, the joint venture relationship between foreign firms and Chinese firms has not been as effective in leading to the development of design and other advanced capabilities. Other indicators of Chery’s success come from important strides in adopting lean manufacturing and achieving the most advanced international certification for quality control. Chery may even be in a position to purchase the assets and brand of a Western auto firm during the economic crisis of 2009.

One of the most important issues in Chinese business involves the protection of intellectual property, with much criticism offered of Chinese firms for pilfering ideas and of the Chinese government for lax enforcement. Chery, and the Chinese automotive industry in general, have been associated with this problem. For several years, Chery was accused of copying the design of two GM owned Daewoo autos without a license and without paying royalties. Chery has countered that it did have a license before GM’s purchase of Daewoo. But Chery was able to hire several Daewoo engineers who brought complete car designs with them, designs used to produce both GM and Chery models. The GM lawsuit over this issue was settled in 2005.

Chery is positioned to become a very successful company. It has an entrepreneurial management, a strong set of knowledge and technology capabilities, a very significant international presence and is located in the world’s most dynamic automobile market.